Elecon Engineering Company Limited (NSE:ELECON) Looks Like A Good Stock, And It's Going Ex-Dividend Soon

Readers hoping to buy Elecon Engineering Company Limited (NSE:ELECON) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 6th of September, you won't be eligible to receive this dividend, when it is paid on the 17th of October.

Elecon Engineering's next dividend payment will be ₹0.20 per share. Last year, in total, the company distributed ₹0.20 to shareholders. Last year's total dividend payments show that Elecon Engineering has a trailing yield of 0.7% on the current share price of ₹29.9. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Elecon Engineering can afford its dividend, and if the dividend could grow.

See our latest analysis for Elecon Engineering

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Elecon Engineering has a low and conservative payout ratio of just 3.6% of its income after tax. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 5.3% of its cash flow last year.

It's positive to see that Elecon Engineering's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Elecon Engineering paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Elecon Engineering has grown its earnings rapidly, up 35% a year for the past five years. Elecon Engineering earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Elecon Engineering's dividend payments per share have declined at 18% per year on average over the past ten years, which is uninspiring. Elecon Engineering is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is Elecon Engineering an attractive dividend stock, or better left on the shelf? It's great that Elecon Engineering is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Elecon Engineering looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

Curious about whether Elecon Engineering has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.